Economics 101 - Cornell University



Econ 1120-INTRODUCTORY MACROECONOMICS

PRELIM #2-Wissink-S2015-April 9

CLEARLY PRINT YOUR NAME: ______________________________________________________________

YOUR NetId:______________________ YOUR STUDENT NUMBER:________________________________

INSTRUCTIONS and EXAM TAKING POLICY:

There are two sections in this exam. Answer all questions.

Part I: 14 multiple choice questions @ 3 points each

Part II: 3 problems @ 19, 19 and 20

TOTAL POINTS = 100, TOTAL TIME = 90 minutes.

NO QUESTIONS CAN BE ASKED DURING THE EXAM ABOUT EXAM CONTENT: If you need to use the restroom, or you need a pencil or scratch paper, or some other supply that we might have, raise your hand and wait for the proctor to come to you. Only one person can be out of the examination room at a time, and the proctor will hold onto your exam papers while you are out at the restroom.

NO CELL PHONES, NO IPODS OR SIMILAR DEVICES WITH CALCULATOR “APPS”.

NO GRAPHING CALCULATORS.

NO BOOKS. NO NOTES. NO HELP SHEETS.

NO TALKING TO EACH OTHER.

CIRCLE the SECTION you regularly attend (that is where you will pick up your prelim)

|DIS # | |TA |Meeting Times |

| | | | |

|250, 251 | |Ye, Lei (Sandy) |Mondays 01:25-03:20 |

| | | | |

|252, 253 | |Kwon, Donghwee |Wednesdays 02:30-04:25 |

| | | | |

|254, 255 | |Lamachhane, Sujan |Fridays 09:05-11:00 |

| | | | |

|256, 257 | |Zhang, Xingtong |Fridays 01:25-03:20 |

One more time, please…

CLEARLY PRINT YOUR NAME: ______________________________________________________________

YOUR NetId: ___________________________

YOUR STUDENT NUMBER: ___________________________________

GRADING

MC (out 42 points)=___________________

Q1 (out of 19 points)=_________________

Q2 (out of 19 points)=_________________

Q3 (out of 20 points)=_________________

TOTAL SCORE: _____________________

Part I: Multiple Choice. Do them ALL.

CIRCLE the letter for your answer.

_____________________________________________

[i]. Which one of the following is always TRUE? Note: the notation refers to marginal and average propensity to consume (MPC and APC) and marginal and average propensity to save (MPS and APS) and aggregate output (Y).

A. MPC + APC = 1

B. MPC + MPS = 1

C. APC < MPC

D. MPC + MPS = Y

E. APC < APS

[pic]

[ii]. Refer to the table for all the information you need on a simple frugal economy with no government or international sector. At an aggregate output level of $100 billion, the unplanned change in inventory is

A. -$20 billion.

B. -$80 billion.

C. -$60 billion.

D. $120 billion.

E. $20 billion.

[iii]. Consider a simple frugal governed economy with no international sector and only one marginal propensity, the marginal propensity to consume, which equals 0.9. If equilibrium output Y* rises by $100 billion due to an increase in government spending, the increase in government spending must have been

A. $100 billion.

B. $90 billion.

C. $50 billion.

D. $10 billion.

E. $1 billion.

|Aggregate Output (Y) |Aggregate Consumption |Desired Investment |

|$3,000 |$2,000 |$1,600 |

|$4,000 |$2,800 |$1,600 |

|$5,000 |$3,600 |$1,600 |

|$6,000 |$4,400 |$1,600 |

|$7,000 |$5,200 |$1,600 |

|$8,000 |$6,000 |$1,600 |

[iv]. Consider the economy referred to in the table above and assume there is no government and no foreign trade in the model. Ignore the money market. If the economy is in equilibrium, and planned investment increases by $200, then Y* will

A. increase by $200.

B. decrease by $200.

C. increase by $1,000.

D. decrease by $1,000.

E. increase by $250.

[v] Consider an economy completely described by the following two equations: S = -400 + 0.2Y and Id = 3,000.

The “paradox of thrift” applied to this economy suggests that

A. an exogenous increase in subsistence consumption will make it so that, in equilibrium, people actually consume less.

B. an exogenous decrease in subsistence consumption will make it so that, in equilibrium, people actually save less.

C. an exogenous decrease in subsistence consumption will make it so that, in equilibrium, people save the same amount.

D. an exogenous increase in desired investment leads to less saving in equilibrium.

E. an exogenous increase in desired investment leads to less consumption in equilibrium.

[vi]. Banks hold no excess reserves and the required reserve ratio is 10%. If the FED buys up $10 million in bonds from the public, but the public deposits only $8 million of the money received into commercial banks (and keeps the other $2 million as cash), then the maximum resulting increase in the money supply from this open market purchase will be:

A. $8 million

B. $80 million.

C. $10 million.

D. $100 million.

E. $82 million.

[vii]. The economy of Greenspan is in equilibrium and can be completely described by the table. If its full employment output, YFE, is equal to $3,000 then

|Greenspan’s Economy (note that YFE = $3,000) |

|$Y |$C |$T |$Id |G |

|0 |1,050 |100 |50 |900 |

|1,000 |1,550 |100 |50 |900 |

|2,000 |2,050 |100 |50 |900 |

|3,000 |2,550 |100 |50 |900 |

|4,000 |3,050 |100 |50 |900 |

|5,000 |3,550 |100 |50 |900 |

|6,000 |4,050 |100 |50 |900 |

A. the economy of Greenspan must always equilibrate at Y=$3,000.

B. the economy of Greenspan is currently experiencing higher unemployment than is consistent with full employment.

C. the economy of Greenspan will have inflationary pressures.

D. the economy of Greenspan is running a budget surplus.

E. the economy of Greenspan must be experiencing unplanned accumulation of inventories.

[viii]. Referring back to the information about Greenspan, if Greenspan were to increase taxes so that T=$1,100 and simultaneously increase government expenditures so that G=$1,100

A. the economy would be unchanged.

B. the economy would experience a severe jump in inflationary pressure.

C. the value of Y* would decrease by $600.

D. the economy would get to full employment Y.

E. the value of Y* would increase by $1100.

[ix]. Assume there is no leakage from the banking system and that all commercial banks are fully loaned up. The required reserve ratio is 16%. If the Fed sells $5 million worth of government securities to the public, the change in the money supply will be

A. +31.25 million.

B. -$16 million.

C. -$31.25 million.

D. -$80 million.

E. +$80 million.

[x]. Jamee Diamond offers you the following risk free promissory note today: “I Jamee Diamond promise to give you $2,000 two years from today.” Suppose the current market interest rate is 2%. Suppose there is no inflation.

A. Jamee’s promise is worth less than $2,000 today.

B. Jamee’s promise is worth exactly $2,000 today.

C. Jamee’s promise would be worth more today if the market interest rate were 6% rather than 2%.

D. Jamee’s promise would be worth more today if you received the $2,000 three years from today rather than two years from today.

E. Jamee’s promise is worth $1,961 today.

[xi]. Consider our model of an economy where there is a “goods and services market” and a “money market” where money demand depends on the interest rate and aggregate output. Suppose the desired investment curve is very sensitive (that means flat) with respect to the interest rate. In such an economy

A. the fiscal policy crowding-out effect is small.

B. the fiscal policy crowding-out effect is large.

C. monetary policy is extremely ineffective.

D. reducing the money supply will have a big impact on Y*, whereas increasing the money supply has very little impact on Y*.

E. there is no feedback effect with either monetary or fiscal policy.

[xii]. Assuming money demand depends on all three variables we introduced, what is the chain of events that results from a Federal Reserve Bank open market sale of securities to the public?

A. Aggregate output decreases, demand for money decreases, the interest rate decreases, planned investment increases, and aggregate output increases.

B. Money supply decreases, the interest rate increases, planned investment decreases, aggregate output decreases, and money demand decreases.

C. Money demand decreases, the interest rate increases, planned investment decreases, aggregate output decreases, and money demand decreases.

D. Money supply decreases, the interest rate decreases, planned investment decreases, aggregate output decreases, and money demand decreases.

E. Money supply decreases, the interest rate increases, planned investment decreases, aggregate output decreases, and the money demand remains unchanged.

[xiii]. Consider the money market in the graph. Firms and households will attempt to reduce their holdings of money by buying bonds

A. at any interest rates less than 3%.

B. at an interest rate equal to 3%.

C. at an interest rate equal to 5%.

D. at any interest rate greater than 5%.

E. only at interest rates greater than 8%.

[xiv]. Which one of the following pairs of events will definitely lead to a decrease in the equilibrium interest rate in the money market?

A. The sale of government securities by the Federal Reserve to the public and an increase in the price level.

B. A decrease in the Federal Reserve’s discount rate and an increase in the level of aggregate output.

C. The purchase of government securities from the public by the Federal Reserve and a decrease in the price level.

D. A decrease in the Federal Reserve’s required reserve ratio and an increase in the level of aggregate output.

E. All of the above.

Part II: Make sure you read and do ALL parts of each question. Show as much work as possible. TRY to get started on every question. Show us something. Write legibly and remember to label all graphs and axes in diagrams.

1. Illustrated below is everything you need to know about the T-accounts for The FED, the consolidated Commercial Banks, and one citizen (of many) named Leroy J. Gibbs in a very small economy which uses the dollar($) as its currency. Assume the following: the required reserve ratio is 5%, all loan activity in the economy is handled via demand deposits, all demand deposits stay in the banking system, and banks operate with zero excess reserves.

|Initial Position |

|The Federal Reserve Bank(FED) |Commercial Banks |Gibbs |

|Assets |Liabilities+ |Assets |Liabilities+ |Assets |Liabilities+ |

| |Net Worth | |Net Worth | |Net Worth |

|Securities=$1,000 |$45=Reserves |Reserves=$45 |$900=DDp |DDGibbs=$15 |$0=Debts |

| |$300=Currency |Loans=$855 |$0=Net Worth |Securities=$50 |$105=Net Worth |

| |$655=Net Worth | | |CashGibbs=$40 | |

|Final Position |

|Federal Reserve Bank |Commercial Banks |Gibbs |

|Assets |Liabilities+ |Assets |Liabilities+ |Assets |Liabilities+Net |

| |Net Worth | |Net Worth | |Worth |

|Securities= | =Reserves |Reserves= | =DDp |DDGibbs= |$0=Debts |

| | | | | | |

| | | | | | |

| | =Currency |Loans= |$0=Net Worth |Securities= |$105=Net Worth |

| | | | | | |

| | | | | | |

| |$655=Net Worth | | |CashGibbs= | |

| | | | | | |

| | | | | | |

a. What is the initial value of the money supply, M1?

b. Suppose the FED decides to BUY UP all of Gibbs’ securities. Assume that Gibbs gets paid for his securities with a demand deposit that he leaves in the banking system. In the end, after all loans are made and loans are spent and monies deposited back into the commercial banking system, by how much will the money supply have changed, and in what direction, as a consequence of the FED’s open market operation with Gibbs?

c. Fill in all the missing values in the T-accounts.

d. Identify two realistic changes to the assumptions made in this question that would reduce the impact of the FED’s open market operation with Gibbs.

ANSWERS

2. Suppose that the following set of equations describe ALL the relevant information about the island nation, Isle d'Yellin. Assume the fiat currency is the dollar and its symbol is $.

• Consumption function: C = 6,500 + 0.75Yd (where Yd = disposable income)

• Desired Investment function: Id = 700

• Government expenditures function: G = 800

• Tax function: T = 200 + 0.50Y

• Export function: EX = 400

• Import function: IM = 200

• The full employment level of national income is YFull employment = 15,000

• The money market can be safely ignored for now.

• Inflation is assumed to be non-existent.

a. Determine the equilibrium level of national output(income), Y*. Show your work.

b. Determine the value of the government expenditure multiplier. Show some work.

c. Sketch the equilibrium position in a “Keynesian Cross” diagram. You must label your graph.

d. How could the government use fiscal policy via “G” to achieve full employment national output(income)? Be specific with your answer – that is, state by how much and in what direction G changes. Show your work.

e. Sketch this fiscal policy in the “Keynesian Cross” diagram you already constructed.

ANSWERS

ANSWERS

3. Suppose the following information for the economy of Bensylvania which uses the dollar ($) as its currency. Currently Y*=$300,000 and YFE=$312,000. The investment multiplier is 4. The desired investment function is Id=10,000-10,000r where r is the interest rate (in decimal form). Money supply is completely determined by the FED. Assume all banks operate at zero excess reserves and that all money stays in the banking system.

Assume the following money market equations:

• Money demand = MD = 10,000 - 9,000r

• Money supply = MS = 4,600

• The required reserve ratio for the banking system = rrr = 5%. = .05

a. Given the money supply, what is the current equilibrium interest rate?

b. Given the current equilibrium interest rate, how much is Id?

c. If the monetary authorities (the FED) want to get the economy to YFE, by how much and in what direction would investment need to change via monetary policy?

d. In order to achieve full employment output, should the FED buy or sell securities?

e. How many dollars of securities should the FED either buy or sell (based on your answer above)?

f. What is one reality wrinkle that could make the FED’s impact on the economy weaker than this model predicts?

ANSWERS

ANSWERS

ECON 1120 S2015 PRELIM 2 ANSWERS

-----------------------

[i]. B.

[ii]. B. Consumption + Desired investment = $180, but only $100 worth of stuff was currently made, so there is $80 of unplanned depletion of inventory.

[iii]. D. If mpc=0.9 then the government multiplier is 1/(1-.9)=10. So "Y*=Kg"G ( 100=10"G ( "G=10.

[iv]. C. The marginal propensity to consume can be calculated as follor is 1/(1-.9)=10. So ∆Y*=Kg∆G ( 100=10∆G ( ∆G=10.

[v]. C. The marginal propensity to consume can be calculated as follows: when output increases from 3000 to 4000, consumption increases from 2000 to 2800. Therefore, the mpc is (2800-2000)/(4000-3000)=0.8. In turn, the multiplier is 1/(1-0.8)=5. Therefore, Y* increases by 200*5=1000.

[vi]. C.

[vii]. E. So there is only +2mil for the cash part and then the +8mil that goes into the banking system becomes +80mil since the money multiplier is 10. So added together you get +82 million.

[viii]. C. Note that Y* is currently at Y*=4000. So Greenspan is producing more than YFE, so it is in an inflationary gap.

[ix]. C. The government multiplier is 2. The tax multiplier is -1. Current Y*=$4000. The change in G is +200. This increases Y* by +400. The change in taxes is +1000 and this changes Y* by -1000. So the net is -600.

[x]. C. Selling securities will decrease the money supply. The amount is equal to -5/.16=-31.25.

[xi]. A. A classic example of the time value of money. The promise will worth less than $2000. So B and E are incorrect. If the interest rate is higher, or the time to maturity is longer, the promise will worth even less. Therefore, C and D are incorrect.

[xii] B. The crowding-out effect is bigger when investment is sensitive to interest rate. Therefore, B is correct but A is incorrect. Monetary policy influences the economy through the interest rate. Therefore, the fact that investment curve is sensitive to interest rate is good news for monetary policy.

[xiii] B.

[xiv]. D. Above r*=5% these is excess supply of money, so people will attempt to get rid of money by buying bonds, driving the price of bonds up and the interest rate down.

[xv]. C.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download